Headquartered in London, Diageo plc was the world’s biggest distiller until 2017, when it was overtaken by China’s Kweichow Moutai. It operates in over 130 countries and is the company behind brands like Johnnie Walker, Guinness, Smirnoff, Baileys and Captain Morgan, to name a few. Diageo has a primary listing on the London Stock Exchange and a secondary one in New York.
Currently hovering around 3750 pence a share, the stock is up ten-fold from its 2000 bottom at 375. This translates into a CAGR of 11% over those 22 years, not counting the dividends. Overall, long-term investors have every reason to be pleased. Diageo delivered a good return and a good night’s sleep at the same time.
However, the stock has had its fair share of violent declines. The most notable one started in September 2019 and culminated in the Covid panic of March 2020. The share price fell 43.6% during those seven months. Unfortunately, the Elliott Wave chart below suggests the bears might try to repeat that soon.
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Diageo ‘s weekly chart reveals that its 22-year uptrend looks like a complete five-wave impulse now. The pattern is labeled (1)-through-(5), where the five sub-waves of wave (3) are also visible. A triangle correction seems to have formed in the position of wave 4 of (5). Wave 5 of (5) is still missing, so it makes sense to expect one last push towards 4200 – 4500 pence a share.
Diageo Offers an Unfavorable Risk/Reward Ratio
The trouble is that according to the theory, a three-wave correction follows every impulse. Furthermore, it usually erases most or all of the gains achieved by the fifth wave. So instead of celebrating the new record, we think investors should brace for a major plunge back to the support of wave (4) below 2500 GBp.
The company’s valuation is another reason to take a pause. Diageo expects to grow its organic operating profit by 6-9% a year until 2025. Yet, the stock trades at a high-growth forward P/E of 21. Elliott Wave aside, we think the current price carries more risk than potential reward. Especially when you consider that you can buy a company like Alphabet at a lower multiple right now.
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